Source Energy Services Ltd.'s (TSE:SHLE) Path To Profitability

By
Simply Wall St
Published
April 26, 2019
TSX:SHLE

Source Energy Services Ltd.'s (TSE:SHLE): Source Energy Services Ltd. produces, supplies, and distributes Northern White frac sand used primarily in oil and gas exploration and production in Western Canada and the United States. On 31 December 2018, the CA$96m market-cap posted a loss of -CA$2.2m for its most recent financial year. As path to profitability is the topic on SHLE’s investors mind, I’ve decided to gauge market sentiment. I’ve put together a brief outline of industry analyst expectations for SHLE, its year of breakeven and its implied growth rate.

Check out our latest analysis for Source Energy Services

According to the 9 industry analysts covering SHLE, the consensus is breakeven is near. They anticipate the company to incur a final loss in 2019, before generating positive profits of CA$4.0m in 2020. SHLE is therefore projected to breakeven around a few months from now. What rate will SHLE have to grow year-on-year in order to breakeven on this date? Using a line of best fit, I calculated an average annual growth rate of 39%, which is extremely buoyant. If this rate turns out to be too aggressive, SHLE may become profitable much later than analysts predict.

TSX:SHLE Past and Future Earnings, April 26th 2019
TSX:SHLE Past and Future Earnings, April 26th 2019

I’m not going to go through company-specific developments for SHLE given that this is a high-level summary, but, bear in mind that typically oil and gas companies, depending on the stage of operation and resource produced, have irregular periods of cash flow. This means that a high growth rate is not unusual, especially if the company is currently in an investment period.

Before I wrap up, there’s one issue worth mentioning. SHLE currently has a relatively high level of debt. Typically, debt shouldn’t exceed 40% of your equity, which in SHLE’s case is 49%. Note that a higher debt obligation increases the risk in investing in the loss-making company.

Next Steps:

This article is not intended to be a comprehensive analysis on SHLE, so if you are interested in understanding the company at a deeper level, take a look at SHLE’s company page on Simply Wall St. I’ve also put together a list of important factors you should look at:

  1. Valuation: What is SHLE worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether SHLE is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Source Energy Services’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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